GBP outperforms EUR amid US-EU trade deal

The pound has outperformed the euro since the news of the EU trade deal. Not only is the UK less exposed to the trade war than its European peers, but Britain has also managed to secure a more favourable deal (10% tariffs as opposed to 15%).

Even once taking into account the fiscal problems in the UK, we think that there is room for a further move higher in GBP/EUR, even if only a modest one from current levels.

This week is an unusually quiet one in the UK, with limited macroeconomic news on tap, aside from some second-tier housing data on Friday. Sterling may instead be driven by expectations for next week’s Bank of England meeting.

Swap markets are still almost fully pricing in another 25bp cut (88%), so the focus will be on both the number of votes in favour of a rate reduction and the tone of the communications, namely whether fears over the jobs market will be sufficient to warrant further easing at the next but one meeting in November.